The fascinating process of fundraising

Twenty companies went through fundraising at AngelPad; some had commitments within an hour

Most founders fundraise twice in their lifetime. I have seen over twenty companies raise funds since I started AngelPad and the process is fascinating.

It is as diverse as the startup world: Some companies have commitments and are “oversubscribed” within hours, others have to work hard to ultimately succeed in raising funds (let’s not forget that fundraising success does not mean business success), and others end up selling the company in the process.

Part of our mentoring program at AngelPad involves working with founders throughout their fundraising process and we ask our founders to closely keep track of their fundraising meetings as well as submit a survey back to us. The 13 AngelPad companies of the Winter 2011 session had over 350 meetings with VCs, Micro VC and Angels. On average they met with 27 investors each – the range being 11 to 48.

Most of the meetings were with VCs (171), followed by Angels (140) and Micro VCs (46). Broken down per company that is on average 13.1 VC meetings, 10.7 Angel meetings and 3.5 Micro VCs meetings.

The vast majority of companies succeeded in raising funds, many have not announced it yet though (so far of the AngelPad Winter 2011 session, only Coverhound, Shopobot, Crittercism and Astrid made announcements). Hopscotch was acquired.

Based on this experience, here is my take on the fundraising climate of the last quarter:

Seed is the new A: Rounds are larger, caps are higher – this should not be a surprise to anyone. However, to assume that every company is priced at 5M or more is a mistake. Many investors – especially angels – have dropped out of the market assuming the caps are out of their reach and that it is harder to make money. Very few angel investors are active in rounds north of $5M. It is however important for founders to be aware of the effects of a high cap in a seed round.

VCs invest earlier: Most VCs are active at seed stage. Almost 50% of all AngelPad Winter 2011 fundraising meetings were with VCs, so anyone who says VCs are not investing at seed stage is not up to date. The majority of rounds in AngelPad companies have at least two VCs involved. This creates a unique challenge: VCs do not operate like angels and Micro VCs, they have a partnership process that takes time and effort. The average fundraising time has been considerably longer in rounds with multiple VCs. Even the firms who claim that any partner can invest $ xxx without the partnership are slower to commit than angels and Micro VCs. One notable exception was Google Ventures - making offers to several AngelPad companies within 24 hours of demo day.

Caped Notes are the standard: Convertible Notes with Cap are still the most common funding form. They are easy, inexpensive and close faster. However, many important questions regarding valuation, board composition and stock preferences are pushed into the future. Priced rounds are becoming more popular again mostly because of tax incentives. Most funds prefer priced rounds but “are ok with convertible notes”. Founders almost always prefer convertible notes.

Four Demo Days swamp every calendar. The large number of startups fundraising at the same time is adding complexity to the fundraising calendar. Demo days at AngelPad, 500 Startups, YCombinator and Techstars NY, produced more than 100 companies fundraising at exactly the same time last April. Founders who are not part of an incubator should try to navigate the demo day calendar and raise funds during “off-time” (YC’s demo day is on August 24th – from that day on startups compete with 64 well-prepared startups for meetings. AngelPad’s fall demo day is in late October).

AngelList is here to stay: AngelList has replaced the “executive summary”. Six months ago most of the investors on AngelList were Angels. This has dramatically changed. Almost every firm has a few partners or associates on AngelList and frequently use it to make introduction to other investors. AngelList has become so prominent that it is now common practice for startups to add a link to Angel.co to their company profile. AngelList is also helping to introduce startups to lesser known and non-Silicon Valley firms in a scalable manner.

One interesting side effect of high valuations and increased VC involvement is that traction and business fundamentals are “en-vogue” again. In 2010, one could raise money with little more than a demo and good credentials – those days are over. Companies have to show strong traction and a clear path to revenue, especially consumer-centric ones. In my experience, “idea-stage” fundraising is at a complete standstill. With seed rounds north of $6M, most investors’ appetite for experimenting and “believing in a team” is pretty limited and suddenly we’re back to the healthy business basics of building something people want and will pay for.

(Editor's note: Tonight Vator and Bullpen will be holding its first-ever evening gathering, called Venture Shift. It will gather top VCs, angels and entrepreneurs to discuss how the venture landscape is changing, and what to do about it. Join Peter Thiel (Founders Fund), Randy Komisar (Kleiner Perkins), Dave McClure (500 Startups), Jeff Clavier (SoftTech VC), Thomas Korte (AngelPad), and many more from August Capital, First Round, etc. Check out our standing-room only event here.)(Image source: Flickr)